Italian bank stocks slump after defeated Renzi resigns

The euro swung wildly against the dollar and bank stocks in Italy slumped as the country appeared headed for a period of political and financial turmoil.

Prime Minister Matteo Renzi said Monday that he would resign after his program of constitutional reform was rejected by Italians in a referendum, with the 'No' campaign winning nearly 60% of the vote.

The prospect of instability in the eurozone's third biggest economy saw the euro initially drop about 1% against the dollar to its lowest level in 20 months. But it bounced back strongly in early U.S. trading.

Italy's main stock market index fell by about 1%,but European stocks were otherwise trading slightly firmer and U.S. stock futures were also positive.

It's unclear what happens next in Italy. Renzi's party may be asked to form a new government, perhaps in coalition with the center right. If all else fails, there may be early elections in 2017.

An extended period of political uncertainty would trouble investors for several reasons.

Bank bailout?

The most immediate concern is a potential banking crisis. Some of Italy's banks are drowning in bad debt -- a legacy of years of economic stagnation -- and urgently need to raise new funds.

The world's oldest operating bank, Monte dei Paschi(BMDPF), is the weakest link. It needs 5 billion euros after failing a test of its financial health earlier this year.

"Due to a likely deteriorating sentiment, some of the ongoing bank recapitalization plans might be more difficult and could be postponed, opening a period of high volatility," wrote Deutsche Bank analyst Paola Sabbione in a report on Monday.

If investors won't back capital increases, then some banks may need a government bailout.

Unicredit said Monday it was in exclusive talks to sell its asset management arm to Amundi of France-- a deal that could bolster its finances.

Risk of recession?

Italy's economy, which has been stuck in neutral for decades, is also likely to suffer. Renzi's government had embarked on a series of reforms aimed at boosting growth and prosperity.

Many of those are incomplete or still in the pipeline, and progress is now likely to stall. New elections could take place, but they may be many months away. Economists expect growth to weaken sharply next year, and some say a return to recession is possible.